Check out this week’s Danger Zone Interview with Chuck Jaffe of Money Life and MarketWatch.com.
Value investors are in the Danger Zone this week, not because value investing is the wrong approach, but because executing this strategy is becoming increasingly difficult if not impossible for most investors.
To execute a value-based investment strategy, one must truly understand the profitability and valuation of a company. This task requires analyzing the company’s annual reports over the last five to ten years, at least. Even professional investors, who spend millions of dollars on and dedicate their professional lives to research, have trouble analyzing the increasingly long and complex annual reports, or Form 10-Ks, published by companies these days. Diligent research takes enormous time and expertise that most investors cannot afford.
More Needles In an Expanding Haystack
Just last week, Justin Lahart of the Wall Street Journal wrote how ridiculously long (152 pages on average) and complex filings have become. Lahart also reported that the stocks were more volatile and the earnings estimates were less accurate for companies with longer filings.
The main issue with today’s filings is how companies use them to hide items that distort their true earnings.
Note that the portion of the filings dedicated to financial statements has hardly changed. It is the footnotes, Management Discussion and Analysis (MD&A) and other complex disclosures that have exploded in length.
Take, for example, AT&T (T). T does not even number many of the pages in its 2013 10-K, but the filing runs into several hundred pages, above average, but not nearly the longest filing, which was Trinity Industries’ (TRN) epic 1,913 page filing. However, what T hid in its filing makes it truly dangerous.
Buried near the end of the filing, T disclosed that it recorded an actuarial gain of $7.8 billionon its pension and post-retirement benefit plans. This gain came almost entirely from the increase in the discount rate it uses for its projected benefit obligation in its pension plans, which are underfunded by about $33 billion.
